Protecting Pensions from Politics

Congress recently voted to protect pensions from politicized mismanagement and ESG fads, but President Biden has announced that he will be vetoing the measure. I recently wrote about this for National Review’s Capital Matters section, and that article laid out a bit of background of the issue:

In the mid-20th century, there were widespread worries that both corporations and labor unions were mismanaging their pension funds and putting the financial future of retirees in jeopardy. In 1961, for example, President John F. Kennedy created the President’s Committee on Corporate Pension Plans to investigate and issue recommendations. Not too long after, in December of 1963, the Studebaker-Packard Corporation defaulted on its pension promises to workers, making many Americans more aware of the threat. Teamster boss Jimmy Hoffa being sentenced to prison in 1967 for defrauding his own union’s pension fund also attracted policymakers to the idea of new legislation that could protect workers. Partially in response to these and other scandals, Congress eventually passed the Employee Retirement Income Security Act in 1974, and President Ford signed it on September 2nd of that same year.

All of this is to say that the rules on what can be included in pension plans and how they should be managed has something of the nature of a sacred trust, given that millions of Americans worked for decades in hopes of enjoying a peaceful and decent retirement, and poor planning by their fund managers could put that in serious jeopardy.  

A few years back, to address the growing controversy over whether political and social goals – that is ESG factors – could be used to guide pension fund investment decisions, the Trump-era Department of Labor published a rule, “Financial Factors in Selecting Plan Investments,” which simply restated ERISA’s requirements that fund managers are required to have a sole focus on delivering returns to beneficiaries. If investing in renewable energy or companies with more diverse management teams could be shown to be motivated by profit potential, then that would be fine. But not if the primary goal was advancing those social goals instead.

That rule was duly considered and published toward the end of the last administration. When the Biden team came into the White House, however, it quickly announced that they had no intention of enforcing the rule, and set about rewriting it. After notice and comment from the public, a new rule, which does allow fiduciaries to consider ESG criteria, was published by the Department of Labor at the end of last year and is the current legal standard.

The recent bipartisan vote in Congress, made pursuant to the Congressional Review Act, which allows Congress to strike down administration rules they disapprove of, would have removed the Biden rule and gone back to the no-ESG-in-pensions standard, but of course President Biden himself had other ideas and vetoed the resolution, meaning that the current yes-on-ESG rule remains in place.

The effort to pass the anti-ESG resolution was not entirely quixotic, however. It demonstrates that there is a congressional majority willing to push back on politicized money management, and it shows everyone in the financial world that ESG initiatives aren’t the feel-good free lunch they were promised to be. CEOs and managers were encouraged to sign on to a long list of climate-change and diversity, equity, and inclusion (DEI) policies with the promise that doing so would make them popular, less likely to be scrutinized by regulators, and generally lower the reputational risk to their firms. The recent vote in Congress is dramatic evidence that those promises have not been delivered.

We also covered this topic in Episode 12 of the Free the Economy podcast (the pension segment starts at 6:12).